Fifth Circuit rejects “passive investor” test for limited partners
Sirius Solutions, L.L.L.P vs. Commissioner. United States Court of Appeals for the Fifth Circuit. No. 24-60240.
The Fifth Circuit held that “limited partner” in § 1402(a)(13) means a partner with limited liability in a state-law limited partnership, not only a passive investor, and it vacated the Tax Court’s decision.
Holding
The Court ruled that § 1402(a)(13) excludes a limited partner’s distributive share from self-employment tax based on limited liability status in a limited partnership. It rejected the Tax Court’s “passive investor” functional test and remanded for further proceedings.
Why It Matters
This creates a direct circuit-level split in approach with the Tax Court’s Soroban line, which treats “limited partner” as limited to passive investors.
It strengthens the position that state-law limited partnership status and limited liability can control the § 1402(a)(13) exclusion, at least in the Fifth Circuit.
It increases uncertainty for partnerships with active owners holding limited partnership interests because the Tax Court still applies a functional analysis.
It pushes the fight back to sta…
